Tough Quarter
JPFA has reporting revenue flat, at just Rp6.62 trillion (+3.0% YoY), thereby meeting 23.8% of our FY17 estimate and 21% of consensus estimate. Cost of goods sold grew faster than revenue (+4.0% YoY), mostly due to increases in raw material costs, which dragged down gross profit (-1.8% YoY). With most costs higher, 1Q17 net income sank by -67% YoY to Rp91.4 billion.
Key Catalysts, Bright Outlook with Better Capital Structure
We believe JPFA’s sluggish performance will recover, following an outlook of stronger demand. This assumption is supported by: 1) Government's ongoing infrastructure projects, pumping the public’s purchasing power; 2) Strong Indonesian economic growth outlook; 3) Solid market penetration with continued expansion; 4) Better leverage ratio, following a capital injection from KKR.
Fresh Money and Value Added from KKR
KKR’s joining in brought fresh equity funding, strengthening the Company's capital structure, as indicated by the improvement in its leverage ratio. An improved balance sheet means the Company can easily refinance its debt at more cheaply. Further, JPFA receives additional value from KKR, who have deep expertise in the Asian agricultural sector.
Valuation and Recommendation: BUY with TP IDR 1,740
Despite weak financial performance in 1Q17, we believe demand will recover in the short-term and continue to grow over the long term; this will tend to boost company performance. We are thus maintaining our recommendation to BUY JPFA (PT: Rp1,740) with 24.57% upside potential from current share price. Currently, JPFA is traded at PE17E/18F of 7.97x – 6.93x and EV to EBITDA17E/18F of 6.42x – 5.34x.
